Stocks — Part VIII: The 401(k), 403(b), TSP, IRA & Roth Buckets

So far in this Series we’ve examined the market and looked at some sample portfolios built from our two key index funds and cash. Those funds are what we call investments.

But in our complex world we must next consider where to hold these investments. That is, in which bucket should which investment go? It is important to understand that 401(k)s, IRAs and the like are not investments themselves. Rather think of them as the buckets that hold the investments we choose. Broadly speaking, there are two types of buckets:

Ordinary Bucket

Tax-Advantaged Buckets

Now at this point I must apologize to my international readers. This post is going to be very US centric. I am completely ignorant of the tax situation and/or possible tax-advantaged buckets of other countries. My guess is that, at least for western style democracies, there are many similarities. Most modern economies recognize the value of investing and seek to encourage it. Hopefully it will be possible for you to extrapolate the information here into something relevant to where you live. If not, feel free to skip ahead. You might find these posts particularly useful:

Here in the US the government taxes dividends, interest and capital gains. But it has also created several tax-advantaged buckets to encourage retirement savings. While well intentioned, this has created a whole new level of complexity. Volumes have been written about each of these and the strategies now associated with them. Clearly, we haven’t the time or space to review them all. But hopefully I can provide a simple explanation of each along with some considerations to ponder.

The Ordinary Bucket is where we hold investments that are not part of any tax-advantaged plan. It is, in a sense, no bucket at all. This is where everything would go were there no taxes on investment returns and no opportunities to defer them. We would just own what we own. Easy peasy!

This is where we’ll want to put investments that are already “tax-efficient.” Tax-efficient investments are typically stocks and mutual funds that pay qualified dividends (dividends that receive favorable tax treatment) and avoid paying out taxable capital gains distributions. Such distributions are typical of actively managed funds that engage in frequent tradingin their portfolios. VTSAX is a classic example of a tax-efficient investment. The dividends it pays are modest and mostly “qualified.” Because trading (buying and selling) in the fund is rare, so too are taxable gains distributions.

Investments that are “tax-inefficient” are those that pay interest, non-qualified dividends and those that generate taxable capital gains distributions. These are things like some stock funds, bonds, CDs and REITs (real estate investment trusts). These we want to keep ideally in our tax-advantaged buckets as their payouts are then tax-deferred.

There are several variations of tax-advantaged buckets, and we’ll look at each. But first let’s look at our three investments and consider where they might fit:

Stocks. VTSAX (Vanguard Total Stock Market Index Fund) currently pays around a 1.8% dividend and most of the gain we seek is in capital appreciation. It is tax-efficient and we can use our ordinary bucket. However, since this will be a large portion of our total holdings and since any investment can benefit from the tax-advantaged bucket, we will also hold it in our tax-advantaged buckets.

Bonds. VBTLX (Vanguard Total Bond Market Index Fund): Bonds are all about interest payments. Other than tax-exempt municipal bonds, they go into our tax-advantaged bucket.

Cash is also all about interest but, more importantly, it is all about ready access for immediate needs. Ordinary Bucket.

None of this is carved in stone.

There may be exceptions. Proper allocation should trump bucket choice. Your tax bracket, investment horizon and the like will color your personal decisions. But the above should give you a basic framework for considering the options.

Before we look at the specifics of IRAs and 401(k)s, this important note: None of these tax-advantaged buckets eliminates your tax obligation. They only defer it. Fix this in your brain. We are talking about when, not if, the government will be expecting the the tax on these accounts to be paid.

When the time comes to withdraw this money, taxes will be due. So will penalties if you withdraw before age 59 1/2. And come age 70 1/2 (except for Roth IRAs) you will be required to begin withdrawals based on what the actuarial tables say your life expectancy will be. These are called RMDs, or required minimum distributions.

Don’t let this scare you; simply be aware. The benefit of having your investments grow tax-sheltered over the decades is no small thing and in most cases you should fund these buckets to the maximum the law permits.

There are strategies that seek to access this money tax-free, or at least at the lowest possible rate. These involve structuring your earned and investment income so as to fall under the limits the IRS establishes as being tax free. So while the money you withdraw is legally subject to tax, your tax bracket is such that the amount actually owed is zero.

Staying under these limits can also provide the opportunity to shift money tax-free over time from your Traditional IRA to a Roth IRA, thus further avoiding taxes when you withdraw and spend it.

These are well worth considering if your situation allows for them. You can find details in these posts…

There are many, many variations of 401(k)-type and IRA-type accounts. We’ll look at the basic types here. The rest are branches from these trees.

Employer-based tax-advantaged buckets

These are buckets provided by your employer. They select an investment company which then offers a selection of investments from which to choose. Many employers will match your contribution up to a certain amount. The amount you can contribute is capped. For 2015 the cap is $18,000 per year and $24,000 for those age 50 and older. You can contribute to more than one plan (if you have access to more than one) but the cap is the total for all together, not for each separately.

In general:

These are very good things, but not as good as they once were. Unfortunately many of the investment firms operating these programs have seized upon the opportunity to laden them with excessive fees. This is outrageous and offensive, but the advantage of having your investments grow tax free is not to be missed. Hold your nose and max out your contributions. I always did.

Any employer match is an exceptionally good thing. This is free money. Contribute at least enough to capture the full match.

Unless Vanguard happens to be the investment company your employer has chosen you may not have access to Vanguard Funds. That’s OK.

Many 401(k) plans will have a least one index fund option. Scan the list of funds offered for the ones with the lowest expense ratio. That’s where you’ll find the index funds, if any.

When you leave your employer you can roll your 401(k) into an IRA, preserving its tax advantage. Some employers will also let you continue to hold your 401(k) in their plan. I’ve always rolled mine over. It gives you more control, greater investment choices and allows you to escape those ugly fees.

You can contribute to both a 401(k) and a Roth 401(k), but the total must fall within the annual contribution caps.

401(k) and 403(b) Type Plans

Contributions you make are deducible from your income for tax purposes.

Taxes are due when you withdraw your money.

Money withdrawn before age 59 1/2 is subject to penalty.

After age 70 1/2 your money is subject to RMDs.

Roth 401(k)

These are relatively new and not yet widely available. It is worth comparing these bullet points to those of the Roth IRA below.

Contributions you make are NOT deducible from your income for tax purposes.

All earnings on your investments are tax-free.

All withdrawals after age 59 1/2 are tax-free.

Once you reach age 70 ½ RMDs take effect.

There is no income limit for participating.

TSPs (Thrift Savings Plans)

These are retirement plans for Federal employees, including military personnel. Think of them as a 401(k), but better.

Unlike the fee heavy cesspool too many 401(k) plans have become, a TSP offers a nice—but not overwhelming—selection of very low-cost index funds.

Looking at the government’s chart of TSP expense ratios going back to 1999 these have ranged from a low of .015% in 2007 to a high of .102% in 2003. The reason for the variation, to quote the government site, is: “The TSP expense ratio represents the amount that participants’ investment returns were reduced by TSP administrative expenses, net of forfeitures.”

Even at their worst, these are very low expense ratios—often lower even than Vanguard index funds, and that’s low! Good deal.

There are five basic TSP funds:

The C-fund replicates the S&P 500 index.

The S-fund replicates the small cap index.

The F-fund is a bond index.

The I-fund is an international stock index fund.

The G-fund holds a non-marketable short-term U.S. Treasury security unique to TSP.

Own both the C and the S in about a 75/25 balance and you’ve basically got VTSAX. But personally I wouldn’t bother. I’d just hold the C-fund and be done with it.

In addition, there are the L-funds. These are “Lifecycle” funds made up of the other five held in various allocations designed for a particular time horizon. L-funds are very much like Target Retirement Funds.

TSPs are a no-brainer. If you are fortunate enough to have access to them, max them out. And in this one case, because of the ultra-low fees, I wouldn’t roll them into an IRA once you leave your job.

Individually-based tax-advantaged buckets: IRAs

IRAs are buckets you hold on your own, in addition to and separate from any employer sponsored 401(k)-type plans. You have complete control in selecting the investment company and the investments for your IRA. This means you also control costs and can avoid those companies and investments that charge excessive fees. Mine are all with Vanguard.

You can only fund these with “earned income” or money you roll over from an employer-based plan. Typically, earned income is money you are paid for the work you do.

There are three types of IRAs. For 2015 the total annual contribution cap is $5,500 and $6,500 for those age 50 and older.

As with the 401(k) and Roth 401(k), you can contribute to both an IRA and a Roth IRA but again the total must fall within the IRA annual contribution caps.

Deductible and Roth IRAs both have income restrictions for participation. Non-deductible IRAs do not. These income limits change year-to-year and vary according to tax filing status and employer plan coverage.

Deductible IRA.

Contributions you make are deductible from your income for tax purposes.

Deductibility is phased out over certain income levels.

All earnings on your investments are tax deferred.

Taxes are due when you withdraw your money.

Money withdrawn before age 59 1/2 is subject to penalty.

After age 70 1/2 your money is subject to RMDs.

Non-Deductible IRA.

Contributions you make are NOT deductible from your income for tax purposes.

There are no income limits for participating.

All earnings on your investments are tax-deferred.

Taxes are due on any dividends, interest or capital gains earned when you withdraw your money.

Taxes are not due on your original contributions. Since these contributions were made with “after tax” money they have already been taxed.

Those last two points mean extra record keeping and complexity in figuring your tax due when the time comes.

Money withdrawn before age 59 1/2 is subject to penalty.

After 70 1/2 your money is subject to RMDs.

Roth IRA.

Contributions you make are NOT deducible from your income for tax purposes.

Eligibility to contribute is phased out over certain income levels.

All earnings on your investments grow tax-free.

All withdrawals after age 59 1/2 are tax-free.

You can withdraw your original contributions anytime, tax and penalty free.

You can withdraw contributions that are conversions from regular IRAs after five years, tax and penalty free.

You can withdraw as much as you like anytime to fund a first-time home purchase or to pay for college related expenses for yourself and/or your children.

There is no RMD.

In short, these can be summarized like this:

401(k)/401(b)/TSP = Immediate tax benefits and tax-free growth. No income limit means the tax deduction for high income earners can be especially attractive. But taxes are due when the money is withdrawn.

Roth 401(k) = No immediate tax benefit, tax-free growth and no taxes due on withdrawal.

Deductible IRA = Immediate tax benefits and tax-free growth. But taxes are due when the money is withdrawn. Deductibility is phased out over certain income levels.

Non-Deductible IRA = No immediate tax benefit, tax-free growth and added complexity. Taxes are due only on the account’s earnings when the money is withdrawn. Contributions can be made regardless of income.

Roth IRA = No immediate tax benefit, tax-free growth and no taxes due on withdrawal. A better Non-Deductible IRA, if you will. But eligibility phases out over certain income limits.

Now, if you’ve been paying attention, you might be thinking “Holy cow! This Roth IRA is looking like one very sweet deal. In fact it is even looking like it violates what Collins told us to fix in our minds earlier: “None of these eliminates your tax obligations. They only defer them.” True enough, but as with many things in life there is a catch.

While the money you contribute to your Roth does indeed grow tax-free and remains tax-free on withdrawal, you have to contribute “after-tax” money. That is, money upon which you’ve already paid tax. This can be easy to overlook, but is a very real consideration.

Look at it this way. Suppose you want to fund your IRA this year with $5,000 and you are in the 25% tax bracket. To fully fund your deductible IRA all you need is $5,000 because, since it is deductible, you don’t need any money to pay the taxes due on it.

But with a Roth, you’d need $6,667: $1,667 to pay the 25% tax due and still have $5,000 left to fund the Roth IRA ($6,667 – 25% = $5000). That $1,667 is now gone forever and so is all the money it could have earned for you over the years.

Were you to fund your deductible IRA, instead of your Roth, you’d still have this $1,667 and it could then be invested. Of course, it is subject to your 25% tax bracket. After paying taxes on it, you’d have $1,250 left to invest ($1,667 – 25% = $1,250).

Curious as to what that might look like? Recalling that the average annual return on the S&P 500 for the 40 years from 1975-2014 was 8.88%:

Of course, if you fail to invest the tax savings you’ll lose this advantage and the Roth would have been the better choice.

It can be very emotionally satisfying to fund a Roth, pay the taxes now and be done with them. But it might not be the optimal financial strategy. If you are still undecided, this series of pros and cons might help.

Because I’m the suspicious type, and the long-term tax advantages of a Roth are so attractive, I start thinking about what might go wrong. Especially since these are such long-term investments and the government can and does change the rules seemingly on a whim. Two potential threats occur to me:

1. The government could simply change the rules and declare money in Roth IRAs taxable. But this is doubtful. Roth IRAs have become so popular and are held by so many people, this seems more and more politically unlikely. Politicians are loathe to take anything away from voters.

2. More likely, the government could find an alternative way to tax the money. Increasingly in the US there is talk of establishing a national sales tax or added value tax. While both may have merit—especially as a substitute for the income tax—these would effectively tax any Roth money as it was spent.

With all this in mind, here is my basic hierarchy for deploying investment money:

Fund 401(k)-type plans to the full employer match, if any.

Fully fund a Roth if your income is low enough that you are paying little or no income tax.

Once your income tax rate rises, fully fund a deductible IRA rather than the Roth.

Keep the Roth you started and just let it grow.

Finish funding the 401(k)-type plan to the max.

Consider funding a non-deductible IRA if your income is such that you cannot contribute to a deductible IRA or Roth IRA.

Let’s finish this post with the recommendation that, whenever possible, you roll your 401(k)/403(b) (but not your TSP) accounts into your personal IRA. Usually this will be when you leave your employer. Employer plans are all too frequently laden with excessive fees and your investment choices are limited. In your IRA you have far more control.

Personally, I’ve always been slightly paranoid about having my employers involved in my investments any longer than I had to. The moment I could roll my 401(k) into my own IRA, I did.

Low fees are critical to your investment returns. Personal Capital is a great free tool to manage and evaluate the investments you have, including costs. If, like most folks, you have a range of investments now you can track and compare them. At a glance you’ll see what’s working and what you might want to change. Very cool.

Note 2:

We’ve touched a bit on tax laws in this post. While the numbers and information are current as of 2015, should you be reading this a few years after publication, they are sure to have changed. The basic principles should hold up for some time, but look up the specific numbers that are applicable for the year in which you are reading.

Note 3:

This is an update of a post and its addendum that appeared originally May 30, 2012 as Part VIII of the Stock Series. Click here if you are curious to read it. I also suggest you check out the conversations in the comments there.

Note 4:

As mentioned in the post, there are many variations of 401(k)-type and IRA-type accounts (457b, Backdoor IRA, SEP IRA and Solo 401k plans come to mine) and clearly we haven’t the time or space to review them all.

But you’ll likely find discussions of them in the comments. In fact, for 457b and Backdoor IRA, they are already there!

In the comments below, reader David raises a great question/concept: Can we avoid RMDs if we rollover a Roth 401k to a Roth IRA?

Based on my research, I can say this:

First, once leaving your employer, you can definitely roll your Roth 401(k) int0 a Roth IRA. Just like rolling a Traditional 401(k) into a T-IRA.

Second, a Roth IRA definitely has no RMD requirement.

But I am unable to find anything on the IRS site or elsewhere addressing how the funds rolled over might be treated regarding the RMD. It appears to be something the IRS has yet to rule on. How it will fall out is anybody’s guess at this point.

If any readers have or find an IRS ruling on this, please post the info in the comments with a link. Thanks!

If his name and website sound familiar to you, it might be because I have had the occasion to link to some of his past posts to amplify a point in one of mine or to introduce concepts I thought valuable to the readers here.

If you want to read all about it, just click on the first link. If you just want to cut to the chase and order it, click on the second. It’s worth your time.

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Comments

I’d caution those who are hoping to take advantage of a backdoor Roth IRA that rolling 401ks (or similar accounts) into a Traditional IRA would complicate things. If you have good options in your plan at work (and can get past the paranoia ;)) then it might make the most sense to leave it there. For example my wife and I both have a couple great Vanguard options in our plans so we will probably opt to leave them in those plans in the event that we need to use a backdoor Roth at some point.

Matt, can you elaborate a bit on what the caution would be? For example, I rolled my 401(k) into a Traditional IRA when I left my last employer. I already had a balance in the IRA from prior years’ IRA contributions. Does that affect my ability to convert the Traditional IRA to a Roth IRA in the future?

Could you please expand on why rolling your 401k to a traditional IRA would complicate things if you plan on using the backdoor Roth? I have a 403b at work with a good vanguard option. When I leave my employer, I had planned on rolling into into my traditional IRA. I already have a traditional IRA with vanguard, wouldn’t it be just as easy to house the money with vanguard? Thanks for your insights.

When you are doing a backdoor Roth IRA you are making non-deductible contributions to a traditional IRA (tIRA) and then converting them to a Roth IRA. When you already have funds in the tIRA they get mixed into the conversion. Reading the article below should help clear it up. Pay special attention to the “Caution” section to see what I was referring to. If that doesn’t help please let me know and I can try to explain it in a more helpful way.

I believe I am limited to just my employer’s 401k plan thanks to income restrictions. Is there a benefit to the non-deductible IRA? It seems like the slight tax advantage of is not worth the added complexity and restrictions on my money.

Great advice!
Personally, I max out my 401K, max out my ROTH IRA, make sure to max out hubby’s traditional IRA, and we started a brokerage account last year. So this year, the hope is to contribute to all buckets. Our IRAs are already maxed out. 401K is on schedule to max out by the end of year. We haven’t contributed to the brokerage account this year but will do so as soon as we have enough money saved up to transfer…probably in the fall. I’ve dubbed our brokerage account our freedom fund!

– Me- Since I already max out my 401K, traditional IRA is not an option for me. So I put the $5500 ROTH IRA

– Hubby- Doesn’t have access to a 401K at work. I max out his traditional IRA, so our taxable income is not so high and we’re not taxed as much. It does end up saving money. Our income is high and we have no kids, so the goal is to shield as much from taxes.

I believe in shielding as much from taxes as possible now. I want our money to grow. In the future, I can always figure out different strategies to shield us from taxes based on the laws then.

Please correct me if I’m wrong, but just because you max out your 401k doesn’t mean you can’t max out a traditional IRA, correct? If you contribute the full 18k to your 401k this year, I believe you can still contribute the full $5500 to a traditional OR roth IRA in the same year (?)

I have been contributing as much as my employer will allow me to my 401K (9%) which comes out to $15,300. I then fund my wife’s traditional IRA with $5,500. The rest goes into our brokerage account at Vanguard. My financial planner friend has strongly suggested that instead of funding the traditional 401k that I fund the Roth 401k at work which would mean that I would pay those taxes now. He tells me that he believes that income tax is going to go up in the US not down and that we’re better off paying the taxes now and being done with uncle Sam.

Last year our Adjusted income was less than $96K (married filing jointly), so I could have contributed to a Traditional IRA after contributing the max to my 401K?

Will my $5,500 deduction to the Traditional IRA be completely deductible then? Because that’s how I’m understanding.

And if so, then I need to figure out what to do for 2015. I already contributed the max to my ROTH IRA, so I guess I have to figure out how to take it out and then transfer the $5500 to a traditional IRA if it makes tax sense.

Thanks for this update — especially the final summary and deployment hierarchy.

A few follow up questions:

1. My understanding from one of your earlier posts or reader interactions is that the income limits for deducting traditional IRA contributions depends on whether you have a retirement plan at work (presumably including a 401k?). Do I have that right?

2. What if one is not eligible to reduce taxes with traditional IRA contributions because of being over the income limit — would that change the deployment hierarchy you suggest?

I’m new to this stuff, just bought my first VTSAX fund this year. I haven’t had to pay tax on it yet, and this is the part I understand the least. How does one hold a VTSAX account in a tax-advantaged bucket such as an IRA? Isn’t the VTSAX the bucket? How is an index fund also able to be simultaneously put in an IRA? I just started looking into what kind of tax I can expect to pay on my VTSAX. That’s all I own. I haven’t considered doing retirement accounts yet since I technically have a pension fund (it’s a NJ pension fund, though, the worst in the country, so I may not even get that, who knows? But, I’ve kind of been considering that to be my retirement account, rather than opening one. I’ve been using the VTSAX to build some wealth from my annual savings.

It sounds like you currently hold your VTSAX shares outside of any tax-advantaged plan. This is what I referred to as the Ordinary Bucket in the post.

That’s fine. You can also have it in an IRA.

Also, as said in the post, VTSAX is an investment not a bucket. So to have it in a tax-advantaged account like an IRA you would:

1. Contact Vanguard to open an IRA (the tax-advantaged bucket)
2. They will ask what investment(s) you want to hold in it.
3. If VTSAX is what you want, that’s what you tell them.
4. You then send them the money and buy the shares.
5. Viola! You have an IRA holding VTSAX

I’m new to this stuff too. My situation (with an NJ pension, but without the VTSAX…yet) and understanding is similar to Dave’s.

I’ve been pretty good at saving, but have always been terrified of investing as I don’t know the first thing about it and it’s very intimidating. Yet I’ve begun to realize having a pile of $ just sitting in the bank earning nothing is just plain foolish. Right now I have about $50K that I feel comfortable investing with to start. Just as Dave, I’m in the wealth building phase (no debt).

So you can have VTSAX in an IRA tax-advantaged bucket, but also in the normal bucket, if I understand correctly. Or are you supposed to have two, one in each bucket? I don’t have anything from work besides the pension (which as Dave makes clear isn’t something to rely on).

I am in the wealth building phase and I see you recommend it’s good to be aggressive, so I figure no bonds for me to start with. All VTSAX. Then I will add bonds later to smooth it out.

I can’t seem to figure out if the Roth or reg IRA is better for me. I like that you have access to that $ in the Roth if you choose to buy a home. I know this is an expensive extravagance, but it’s still nice to have the option.

Aww, no mention of the 457b? I have access to both a 457b and 403b through my university job. I contribute to my 457b first since there is no early withdrawal penalty. After that is filled up, I then contribute to the 403b. Since they are different buckets, I can make a total of $36,000 in tax-deferred contributions!

As I say in the post, “Clearly, we haven’t the time or space to review them all”

and later…
“There are many, many variations of 401(k)-type and IRA-type accounts. We’ll look at the basic types here. The rest are branches from these trees.”

That said, I think you are mistaken in that you can contribute $18,000 to both your 457b and 403b accounts. The limit is $18,000 per year across all account, $24,000 if you are over age 50.

If I’m wrong on this, can you point me to a source? I couldn’t find one allowing for this.

Perhaps you are confusing this with the unique catch-up provisions 457b account provide. From the IRS:

“Special 457(b) catch-up contributions, if permitted by the plan, allow a participant for 3 years prior to the normal retirement age (as specified in the plan) to contribute the lesser of:

“Twice the annual limit ($35,000 in 2014, $36,000 in 2015), or
“The basic annual limit plus the amount of the basic limit not used in prior years (only allowed if not using age 50 or over catch-up contributions)”

Found it from the IRS:
The amount of salary deferrals you can contribute to retirement plans is your individual limit each calendar year no matter how many plans you’re in. This limit must be aggregated for these plan types:
401(k)
403(b)
SIMPLE plans (SIMPLE IRA and SIMPLE 401(k) plans)
SARSEP
If you’re in a 457(b) plan, you have a separate limit that includes both employee and employer contributions.

I was just joking, Jim. You did a great job explaining the main accounts most people have access to. The only way people typically know about the 457b is if they work a government or non-profit job. Too bad it’s not something available for everyone. I’m sure one of these days the government will make it so everyone has equal access to one big, simplified retirement account that gives us control over where we invest our own money. (That was another joke.)

Hi Mr Collins, at my work I have a 403b to which we fill up until we max out at I believe $18,500. After that is filled, all the extra goes into the 457b up to $18,500 also. That’s how I understand it to be.

In this article you write (regarding Thrift Savings Plans): “Own both the C and the S in about a 75/25 balance and you’ve basically got VTSAX. But personally I wouldn’t bother. I’d just hold the C-fund and be done with it.”

I’m curious about this, particularly given the fact that my company’s 401(k) does not offer VTSAX, but it does offer VINIX and VEXAX. I’m 30 and my current allocation is 80% VINIX (expense ratio: 0.04%) and 20% VEXAX (ex. rat.: 0.1%). Do you think I’d be better advised to put everything in the lower-cost S&P index (VINIX) or keep as is? Thanks!

In short while a total stock market fund is my preference, the preference is small and an S&P 500 index fund works just fine. This is especially true when you take into account the larger (although still small as ERs go) ER of VEXAX.

So, yes. Just as with the C-fund, I’d just hold VINIX (an S&P 500 index fund) and happily call it a day. 🙂

Also, current fees for most TSP funds is .029% ($.29/$1,000 invested). There’s not a Vanguard fund that can touch that rate that I’m aware of.

Also, while the TSP is in my eyes the best 401k in the business, it has its limitations. For one, while it has a Roth option, when you withdraw from TSP, you cannot designate which of your accounts to withdraw from (traditional or Roth) — rather, your withdrawals are automatically taken from both funds in proportion to what percent of your total account you have in each (i.e., if 75% is in traditional and 25% is in Roth, a $1,000 withdrawal would be taken as $750 from your traditional, $250 from your Roth.

Second, your withdrawals option are limited. You can only make one partial lump-sum withdrawal. That’s it. You otherwise have to take monthly withdrawals, the amount of which you can only reset once a year. Also, legacy beneficiaries (non-spousal beneficiaries) don’t get the option of stretching payments from the account over the beneficiary’s life expectancy — they get lump-sum payments, which can result in a sizeable tax hit.

All that being said, I plan to keep mine squarely in the TSP when I retire.

I disagree
1, You can’t convert traditional to ROTH from the time you retire to age 70 1/2.
2, You can do VTSAX and VBTLX and the ER is 0.05. Not significantly different than tsp’s current rate of 0.038%.
3, You can’t choose what funds to sell in different markets. For example, you cash bonds during cash and cash stock during the upturn. This is not an option with TSP.
4, You can’t choose to change monthly payments [only once a year]. You cant stop monthly payments.
5, You lack the freedom to sell the bond for stocks during the market crash.
6, Readers of this blog can do better by following the advice of JLC if the money is freed from TSP.
7, TSP modernization is in progress which will likely to increase the fees most likely. But considering the current options, I would roll over my tsp to Vanguard when I retire.

Fantastic overview. I’m sure yopu thought “let’s keep this short and sweet” and hten it becomes a novel. It’s just crazy.

My wife has access to a 457b and a 401k at her state job. I couldn’t believe it when we were comparing the benefits of the two. The 457b has no early withdrawal penalty and uses the same funds. And it it’s all tax deferred. It’s the perfect vehicle to bridge to the regular retirement ages.

Now if only we could invest the 54,000 to max out my 401k and her two funds we’d be set.

Not there yet and currently are paying off PMI and will probably still throw money at the mortgage. I know you’re not a “timing the market” guy and we’re not either, but I feel like it’s been flat for so long. If it makes a big correction, then we’ll divert funds over to the market instead of the guaranteed return on the house. I just have dreams of not having a mortgage payment right now….

Yeah, I know. First, we’re still in PMI so that’s a no brainer, but we’re only a few grand away from 80% so at that point, what to do? I know that the stock market has always gone up but I also don’t want a mortgage. So maybe I’ll switch some of that money over and do something like the guys over at 1500days do. But then again, who knows with the stock market.

I put a lot of money into my 401k so I figure this is like hedging my bets or at least diversifying somewhat. Additionally our housing market is fantastic (ours was on the market 8 days, the longest one was on the market was 6 months since it was 25k over asking). I have dreams of renting it out too. Too much to think about. Sorry for the rambling.

It would require 50% of my salary just to max the 401k before considering adding in the IRA funding and individual account funding. Should i take a lower hit on the 401k and contribute to all 3 or put all money soely into 401k tracking s&p 500 at .06%% ER?

That would absolutely depend on what options you have available in your 401k plan and when you plan to retire, I think. Definitely contribute up to any employer match, but after that look at fee ratios. Since your 401K’s rate is so similar to what you’d pay at Vanguard (500 tracking at 0.05%), I wouldn’t bother with a separate traditional IRA.
However, because you sound like you’re still in a relatively low tax bracket (15-25% range), I would consider allocating a portion to a Roth IRA. You might want to run the numbers and figure out if a Roth’s benefits would outweigh the lost tax savings. It’s more attractive that the 401k if you’re younger, plan on retiring before 59 1/2, or expect to buy a house in the near future.

Glad to see you include the TSP. But there are 5 basic funds: https://www.tsp.gov/investmentfunds/fundsoverview/fundManagement.shtml
Plus the lifecycle funds, which you have recommended in the past (in general) for folks who prefer their investments very simple. Would have loved to have seen you talk a bit more expansively here. That being said, keep doing what you’re doing – I recommend your blog to everyone who asks me for investing advice.

I prefer the C-fund as it is 100% stocks and reflects the S&P 500 index. !00% stocks tends to provide greater returns over time and the volatility doesn’t bother me. The L-fund would be the smoother ride, but likely in exchange for less returns over time.

The S&P 500 makes up about 80% of VTSAX, the rest being small and mid caps. When you graph their performance over time they are within a whisker of each other, the total market index holding a slight edge. Which is why it is my first choice.

But the difference is so slight, and could go the other way, so I’m not willing to jump thru hoops to try to imperfectly duplicate it.

About the TSP: You can do 2 transfers/rollovers after leaving federal service. My suggestion is for people to invest in the Traditional TSP while in-service AND have enough investments elsewhere to cover the first 5 years after leaving service. Immediately after leaving service, conduct a partial transfer from your Traditional TSP to a Traditional IRA for how much $ you’ll need during your “early retirement” after the first 5 years (remember, the first 5 years will be funded from separate investments). Then, conduct transfers from your Traditional IRA to a Roth IRA for how much money you’ll need in your 6th year of early retirement. Repeat that process every year. The reason this process is beneficial is because the Traditional IRA to Roth IRA transfers are considered Roth contributions after 5 years which means you won’t have to pay tax/penalty upon withdrawal. Additionally, by transferring only the amount needed to the Roth it’ll keep your taxes extremely low each year. The reason some money can be left in the TSP is due to its lower expense ratios than civilian offerings. I hate government paperwork and managing multiple accounts, so I’ll possibly just transfer all of my Trad TSP to a Trad IRA when I’m done. 😛

Last, for active duty military… you should prioritize your TSP investments at the beginning of each year prior to other investments. In addition to the lower expenses you pay, it will also increase your chances of being able to contribute more than $18,000 per year if you happen to deploy to a combat zone. The IRS allows you to contribute around $50k if you’re in a combat zone, but there’s a slight catch that’s important hence my suggestion to prioritize TSP first each year. Once you return from a deployment the investment cap is changed back to $18k. As an example, if you deploy from May to October… you had $10,000 invested prior to May (cap of 18k). The last day of your deployment in October you managed to have a total of $30,000 invested (cap of ~50k). Once you return from the deployment you can invest no further in November and December (cap is returned to 18k).
Sorry if this is confusing… it’s late. 🙂

The info regarding contribution limits for active duty military is actually incorrect as explained here. The way the TSP treats money you contribute while deployed (combat zone tax exempt) and while at home (taxable) are completely separate and different.

There is a limit to taxable (Traditional and Roth) TSP contributions of $18,000 for 2015. These show up on your LES as ‘YTD TSP Deferred” for Traditional and “YTD TSP Roth” for Roth. The total between these two accounts cannot exceed $18,000 for the calendar year.

However, there is a total Additional Contribution Limit, which includes combat zone tax exempt pay, shown on your LES as “YTD TSP Exempt”, that has a limit of $53,000 for 2015. So when you contribute while deployed, that money is not taxable and is deposited in this “Exempt” category unless you specify it as Roth. The Exempt and Deferred/Roth buckets are two completely separate entities.

Using your example, you can contribute $10,000 prior to deployment and this will show up as TSP Deferred or Roth, depending on which you choose. Once you deploy, the contributions you make there go into the “Exempt” (or Roth) bucket, which has NO EFFECT on the $18K limit for taxable income, except you cannot exceed $18K in Roth TSP contributed from any type of pay. Everything above $18K must go into Trad TSP. So when you return in November or December, you can still contribute an additional $8,000 into Roth or Traditional, as long as those taxable (deferred plus Roth) contributions plus your Exempt contributions while deployed don’t exceed a total of $53,000 between all accounts or $18,000 in Traditional (Deferred) plus Roth.

So assuming you contributed $10,000 before deployment and you contributed $20,000 while deployed (into Trad TSP, which would go into the “Exempt” category), you would indeed have contributed $30,000 for the year. When you return, you would be able to contribute $8,000 extra into your Trad or Roth to hit the $18,000 limit. You would just be locked out of contributing further to the “Exempt” combat pay “bucket”.

Check out the website below. Reference the chart, as well as the paragraph immediately below it titled “If you are a member of the uniformed services”, which specifically addresses how to add contributions ABOVE the $18,000 elective deferral limit.

Any reason you advocate for VTSAX instead of VTI. A couple of minor differences between a mutual fund and an ETF, but essentially the same vanguard product. I like being able to put in a limit order to try to catch the market bumps even if by a % or so lower than today as the market is always bumping around. Never hit it 100%, but almost never have to alter my limit orders when buying. I suppose looking long term the extra 1 % shouldn’t matter much, but I hate leaving any money on the table which it feels like I do every time I go with mutual funds and taking a bet on any of the next several days market closing prices when the mutual fund, and not I, decide to complete the settlement process.

I have a fairly large sum to invest (RE rental sale, long story) that I want to move to the markets and start tapping into about 5 or 6 years in the future; and while I’ll tax advantage a portion by maxing out all 401K’s, 457’s, etc. for 2015 and 2016 it leaves a still a large lump for the taxable account and I’m trying to decipher if I go all VTI or add in something else since the time horizon for first use is not too far out. Goal is looking to downshift to PT work and start tapping it at maybe 1-2% WR of the overall stash (or ~$15-$30K/yr by then) when I’m in my early 50’s. I do like to work, but want to do fewer hours (or maybe consulting gigs for part of the year). Lets me downshift while also letting the stash continue to grow for a few more years at that low of a WR.

I just use mutual funds for convenience, but sometimes check the market price at around 3:55pm and invest then before close of the trading day if I want to time an extra investment. That’ll get me a close price that I desire.

It was nice reading this post again. I always like thinking about taxes. I am curious about what you think the real value of tax deferral is? You said you would put money into a non-deductible traditional IRA, even if it was more complicated. Would you put money into a 10 basis points tax-deferred annuity to avoid RMD’s at 70 and to have basically the same thing except the extra 10 basis points of fees? Would you do it for 1 basis point? I struggle with this concept at times because I am in a state with state taxes. If tax rates were to rise, especially on dividends and capital gains, what is the value of tax deferral?

As I say in the post, and illustrate, the real value in my mind is that every dollar you pay in taxes is gone forever and, importantly, so is all the money it could have earned for you over the decades.

Where to draw the line on complexity is tough and a very individual call. Non-deductable IRAs require some extra record keeping but nothing too terrible.

I wouldn’t touch an annuity for lots of reasons, including high fees and complexity.

I completely agree with the traditional IRA for the tax deduction. I just don’t know if given the current tax laws, a non-deductible IRA would be worth the extra effort.

You should definitely write a post on annuities. I know in my mind that you’re right about them but part of me thinks about what is the real benefit of tax deferral. Hypothetically a tax deferred annuity, without any cost, could be better than a non-deductible IRA because there are no RMDs. Of course, nothing in life is free, but there are some annuities that are very low cost.

I think the real thing for me is that life and money isn’t about the absolute mathematically best choice. Even if an annuity could hypothetically beat a taxable account, just save a little bit more money and build a little bit more in your FU pile. I’m not buying an annuity anytime soon and simplicity is the reason I am 100% total stock market index in all my accounts vs rebalancing

When I was researching 401(k) Roths for this post, I was surprised at this. Perhaps Congress regrets allowing Roth IRAs to escape RMDs and, while unwilling to take that feature away, they wanted to clip us on the 401(k) version.

But then these are still very new and there are some things concerning them the IRS has yet to rule on. Maybe the treatment of them and RMDs will change. But for now, expect RMDs on them when you hit 70 1/2.

ROTH 401K vs t401K. My employer just offered the ROTH 401 K last year. I LOVED this and switched over 100% from the traditional 401K to ROTH 401K. I love the thought of having a huge bucket of tax free money to spend.
But…We are in a 25% tax bracket now. We plan to retire early. We plan on living on less than $72,500 a year once we retire. That would put us in a 15% tax bracket at that point.
I cannot figure out a scenario where paying 25% tax on my money now to prevent me from paying 15% later makes sense. I am now switching back to the traditional 401K.
2013 with the traditional 401K I got a refund and invested it in taxable Vanguard fund.
2014 with the Roth 401K I owed at the end of the year and obviously was not able to invest that.
What are your thoughts on ROTH v Traditional 401K in a situation where current tax bracket is much higher than projected tax bracket in retirement?
Am I missing something?
Thanks Jim

Have been through the Stock series over the last few days and just wanted to say a huge THANK YOU.

I have been battering my way through the massive amounts of information out there, confusing myself, making mistakes and generally over complicating things. (Which is no bad thing as I tend to learn best from making mistakes 🙂 )

Your clear thoughts on keeping investing simple are very welcome in a market that loves complication.

This series is like a garden full of ripe information, and my my have I been harvesting away as if Winter Is Coming.

I enjoyed your thoughts and comments on dividend growth investing. The comparison to a tree bearing fuit annoys me no end, and the insinuation that index investing is fine for beginnners but if you are intelligent and financially literate then stock picking is the way forwards really grinds my goat (to combine two sayings).

Much of this article can’t be implemented by myself, living in the UK, but the principles still apply.

Jim – I just listened to your appearance on the Create My Independence podcast. Fantastic job, as always. I was wondering if you could comment on one thing that seemed pretty apparent, which was that despite the discussion about market timing Kraig still seemed really hesitant to put his big chunk of money into the market right now. I admit to having similar fears during market highs, when you know a correction will happen at some point and there are a thousand articles published along the lines of “pork belly futures haven’t been at this level against the Swiss franc since just before the last big crash!”

I think there’s an emotional aspect to this – the fear of immediately losing a chunk of cash – as well as a rational basis of waiting for a correction to get stocks on sale. However at the same time I don’t find myself wanting to sell what I already own, or pause my automated investments. There’s something different about having $18k in cash that you want to maximize the impact of vs. the same $18k being silently pulled from your paycheck every couple of weeks for your 401k.

Do you have any suggestions for getting over this psychological barrier? Tuning out the financial press would obviously help; I mostly read it for the laughs anyway. Do you make it a policy to only consider asset allocation, and if you’ve got cash to invest just do it, without regard to any other factors?

Our family is going through changes and I wanted a good sounding board. We are both in our early 40’s and hope to reach FI within 7 years.

I make about $130K per year and she was making about $30K teaching part time. My income alone was funding all of our savings noted below and my income should continue to slowly rise until I reach FI.
• I was maxing out my 401K and her 457 plans (18K each w. index funds) 457 was deducted from her paycheck and I just transferred the same into her checking account.
• I was maxing our ROTH IRA for each of us (VTSAX for both)
• I was also investing about 4K extra in a regular brokerage account (VTSAX)

My wife has just taken a 1 year sabbatical, which we hope becomes permanent. She’ll make income for her expenses by providing child care a couple times per week.
• 457 contribution will no longer be available

Great article as always! I just wanted to add that 401k/TSP plans allow for penalty-free withdrawals after age 55– IF you do not separate from your employer until age 55 or later. In most cases the 59+1/2 rule you mention will apply, but for those seeking ‘slightly early’ retirement this rule can make a big difference!

First I wanted to say I appreciate the stock series you have put together. Between you and Jeremy at GCC I have become truly inspired to retire early. At 30 I said I would retire at 40, but never quite got around to figuring it out, now you and others such as MM have done the leg work. I commend you all for your pay it forward attitudes. So now here I am at 40, settling down (see beautiful Eastern European woman) and have my first baby on the way. My current goal is 45 to retire and I am VERY committed.

On to the point of the post and why I am seeking your feedback… I am in the process of moving overseas and will be leaving my current company. I have a 401k with about 175k in VFIAX (best option they have). I will need to convert this in December as that’s when I will transition and move. In the meantime I am worried about the market & stability of my current on paper 175k and what its value could be in December. I have an option for VBTLX in my 401k, but not sure I should move my money there for “protection” until I convert it to a VTSAX IRA. My instinct is to let it ride, but as I am a fairly new disciple I am looking for any feedback that is helpful. Thoughts on what you might do in this situation? Also is it even possible to convert my 401k to a VTSAX ira?

I have 2 previous 401k’s sitting doing nothing in the old employers plans….can I open a regular investing account with Vanguard or do I have to use a IRA account???? Can I roll them into a VTSAX ?? Total is about 40k..

I probably should have added that I’m very new to all this but love what I have been reading with both you an MMM…I’m a late starter but want to defer as much as possible to all wise investment vehicles…my current 401k is with fidelity and I just allocated today to 1 total market index fund ( exp ratio = .05%) and 2 Vanguard funds with low exp ratios as well since it was the only 2 offered….Just looking for some guidance…..

Yes, you can roll your old 401(k)s to Vanguard into either a regular taxable account or an IRA. But if you roll into the taxable account you will owe taxes and (if you are under 59.5) penalties. Bad idea, that. I’d go for the IRA.

In either case, you can roll into VTSAX.

If your current 401(k) offers a total stock market index fund with an ER of .05 that’s what I’d use.

The Stock Series has been an invaluable resource. It answers all of my questions but one, specifically about buckets. My wife and I file taxes separately because of my exorbitant student loans, which will be forgiven after 10 years of payments through the Public Service Loan Forgiveness Program. Because we file separately, our investment options are limited to three: 1) my wife’s high-fee 403(b) (the best option is VASGX at 1.42%), which we currently contribute to up to the employer match; 2) a non-deductible IRA; or 3) a taxable account. Which bucket or buckets should we be dumping our investments into?

Toward the end of the post above you’ll find my basic hierarchy for deploying investment money bucket by bucket which will answer your question.

But I have a couple of questions for you:

1. Why are you filing your taxes separately? Assuming you are legally married this is the least advantageous way to file. How you file should not, as far as I know, affect your student loans or possible forgiveness. Your wife’s income might affect this, but filing separately won’t help.

2. Why a non-deductible IRA? This implies income high enough to phase out the deductible options. All the more reason to rethink your filing status.

Of course there may be information I am missing or other reasons for your choice. So just consider this a suggestion that it might pay to look at your situation again.

1. To be eligible for PSLF, you must use an eligible repayment plan. I use income-based repayment (IBR). Under IBR, if a married couple files separately, the monthly payment is based on the borrower’s income and a family size of two. If a married couple files jointly, the monthly payment is based on the combined income and a family size of two. Filing separately saves me over $6,000 per year in student loan payments. I have not done a detailed tax comparison, but I don’t think that filing jointly would save me more than $6,000 per year in taxes.

2. If you file separately, and your modified AGI is $10,000 or more, then you cannot take a deduction for your IRA.

I was going to wait until I had a chance to finish reading through your entire series to write you, but I have learned more about investing in an afternoon than I have…since…well, ever. I wanted to thank you for taking the time to write this, I feel like you and I are operating on the same wavelength and I can actually understand the words that you’re saying, unlike much of the other “financial advice” out there.

A little background, I’m currently a military helicopter pilot with a background in aerospace engineering and my wife is a logistics officer with a background in poly sci. I could talk your ear off about aerodynamics and she can smartly manage millions of taxpayer dollars (and even send some it back rather than waste it!), however, when it comes to personal finance we are not only lost, but too busy to figure out where to start.

I immediately logged into TSP and adjusted our contributions after reading parts 1 – 8 today. Thank you for making sense and spelling things out (including all of the acronyms) without talking down to your readers. Your advice is very much appreciated!!

…for taking the time to write. Your kind words are very much appreciated.
All the more so as I write this blog exactly for those who are confused by all the financial nonsense out there and who have more interesting things to do than slog thru it. Like my daughter. 🙂

I’ll pass on the logistics and aerodynamics lectures, but I’d love a ride in the helicopter!

I have a couple of doubts and thought you could help me. Apologies if this in not the right place to post this question.

I’m 26, just started investing, I have 10k vtsax on taxable account and maxed out my traditional IRA (vtsmx). Will make more then 100k this year, wondering if my IRA contribution will still be deductible with this year’s income?

My second question, I freelance and my income varies a lot from one year to another (irregular income) but I’m looking at learning about all my options and since I don’t have access to 401k and I’d like to save more in taxes I was considering registering my own business to open a SEP IRA ? You think this is a good idea for me? Would it give allow me to contribute a lot more then 5.5k on traditional IRA? I mean 5.5k per year just feels too low…

I also looked into HSA as a tax advantaged bucket but was told my insurance is not considered high deductible plan and therefore does not qualify for hsa.

I hope that made some sense, sorry I’m quite new to this and did try to find help on this issue on your website but may have missed it.

With all this in mind, here is my basic hierarchy for deploying investment money:
1.Fund 401(k)-type plans to the full employer match, if any.
2.Fully fund a Roth if your income is low enough that you are paying little or no income tax.
3.Once your income tax rate rises, fully fund a deductible IRA rather than the Roth.
4.Keep the Roth you started and just let it grow.
5.Finish funding the 401(k)-type plan to the max.
6.Consider funding a non-deductible IRA if your income is such that you cannot contribute to a deductible IRA or Roth IRA.
7.Fund your taxable account with any money left.

My wife and I are high earners. We’re hedging the 401k accounts by one going with Roth 401k and the other with Traditional. We’re building up to maxing out the limit going in ($18k each).

If we plan on retiring early, do we want to lower our contributions into 401k and put more into VTSAX (if I read it right, that’s #7 on this list?) to deduct from prior to 59.5?

As a high earner, choosing a Roth 401k over a traditional 401k seems like a poor choice. You might want to reconsider guaranteed higher taxes now to reduce possible lower taxes later. Do you plan on being in a higher tax bracket during retirement (spending more than you currently make)?

I’m on board with the buy and hold an index fund and take the random walk for 40 years.

1) I have access to TSP but go back and forth regarding Roth or trad. All things being equal, will paying taxes now vs at retirement age not end up being the same end amount of money? I have been operating as if it would. Which lead me to consider the possibility of tax rates rising and optimistically thinking I can retire in a higher tax bracket. So I’ve been favoring the Roth. Should I change to trad?

2) I want to do more. I’m sold on VTSAX. I hope to retire at 50. Are you suggesting I put my post tax dollars into VTSAX after maxing my TSP? Won’t I need this as gap money between ages 50 and 59?

Not sure if it’s been mentioned but my employer offers the Simple IRA plan which is a $12,500/yr/max and I’m unsure if that means we can also do a private IRA too or not. It seems like (from the little I’ve read yet) there are income restrictions to make this happen. More research to be done I suppose. My question beyond that would be would you recommend a Roth in the one instance as a college savings plan for my children instead of a 529 plan? I feel like the restriction on the 529s would be a bummer if I couldn’t use up those funds just for college. Along with that, would you do a separate 529 for each child (if that’s the best route) or lump it all together. ( I have 4 children.) For ease doing a Roth seems like the most straightforward to me, in my name, and I can use it for college. I guess the drawback is that I’m still in my working/savings years, so I can’t get a tax advantage with it today.

A Roth for your kids is a great idea, but to fund it they must have earned income. You can provide the money to fund it, but they must have at least that much in earned income themselves. I did this for our daughter once she started working part-time jobs.

Just found the stock series and I am hooked. I currently have a Roth IRA with $23k invest in various mutual funds. I now see the light with Mutual Funds vs Index Funds. With that being said, should I move to setup my Roth IRA to be 80% VSTAX and 20% VBTLX? I am 28. Thanks!

I’m maxing out my 401k pretax, maxing my roth, and debating on funding an extra chunk of after-tax contributions for my 401k. Would you recommend that or just sticking it in a traditional brokerage? I’m on the early retirement path (as in 5-10 years away) and making a little over 100k gross per year.

At my income, having a work sponsored 401k disqualifies me from making further deductions for a traditional ira because I make over $71,000 per year. The Roth is because I figure I won’t need some for a long time and it can grow tax-free.

This is obviously my own choice but your wisdom is what pushed me to first get a 401k in the first place. So just stick all the surplus (after 401k and HSA) in a brokerage, right?

Even with the fees that an HSA includes? Last year, I decided I wanted to move my HSA to Vanguard instead of the one it was at–since just about everyone else kills you in fees. After a lot of confusion the new HSA was open only to discover a “hidden” $50/year automatic fee on top of some min requirements. I managed to return to my old HSA and call it a day. Still don’t max it out–don’t even use it unless I have medical fees because I’ve put my savings elsewhere–even taxable–just to avoid HSA fees. Any thoughts on this?

This post will focus mostly about some questions I have about three of my tax sheltered retirement accounts, but I thought I ought to provide some background about myself for some context. I’m 43 and a college professor. I’ve now worked in that capacity for two universities (I was at the first one for three years and am nearing the end of my eleventh year at the current one). I don’t want to quit tomorrow, but I also don’t think I’ve got it in me to work as a university professor until traditional retirement age. I’m aiming for switching to a semi-retired state by around 55, give or take (Some income would potentially continue to come in from my other interest/skill (woodworking)). Therefore, I’m pretty motivated to do what I can to maximize the efficiency of my existing retirement accounts and possibly start building some new ones.

I have a 403b from the first university that is managed by FTJ Fund Choice. It’s balance is currently near 50K. I also have a small Roth IRA with FTJ ($3200 or so). Both are managed assets with the expected management fees and have been sitting without any additional contributions from me since I left the first university. The university I am now with offers its primary retirement through only one vendor: TIAA-CREF. The account allows you to distribute assets between a traditional annuity (with a minimum growth of 3%), stocks, bonds, and real estate. My account currently is a blend of all four of those categories. The current balance is about 98K. This is an account that involves both payroll deductions and a smallish employer match.

Currently the only one of these accounts that is seeing contributions from me is the TIAA-CREF account. Shortsightedness is the only explanation, but the good news is that I’m aggressively turning this around. I have two debts: (1) consumer debt on a credit card with 8% interest. I’m on a pretty strict budget where I’m throwing everything beyond food, housing, and utility bills at the balance and expect to see it paid off within a year. (2) My mortgage. The note is held by my family rather than a bank. After the consumer debt is gone, I plan to accelerate the mortgage payments and increase contributions to my retirement accounts. This brings me back to my questions:

Question 1. Aside from the fact that I’ve simply been consuming rather than saving, there are a few reasons I’ve left the 403b with FTJ idle. First, FTJ is not a vendor that has been approved by my current university, so I was unable to contribute to that account with pretax money when I took my current job. At the time, there was not a 403b option that my current university offered, so to my understanding at the time, there was no place to roll the 403b from FTJ into. That has since changed. I can now set up a 403b through TIAA-CREF, ING, or VALIC but there is no matching of funds offered by my university. Once the consumer debt is out of the way, I’d like to start building this asset. My question is, what would be the best option? I can think of a couple, but I am having a hard time weighing their advantages and disadvantages. Option A would be to roll the FTJ 403b into one available through my current university and start contributing at or near the maximum once the consumer debt is gone. I’ve not investigated what is available through ING or VALIC, but there are a few index funds available through TIAA-CREF, and I would be inclined to balance most if not all of my allocations there instead of bonds or real estate if I went with this option. Lately, these have shown an ER of anywhere from .38%-.60% or more. I’ve had a tough time finding information about additional fees that TIAA-CREF charges, but I have an opportunity to grill a human about this at an upcoming annual meeting in April. One additional reason I’m thinking about Option A has to do with tax brackets. I’m single with no dependents, and currently gross about 60K before taxes each year (currently). I am usually in the 25% bracket as a result of this, but think that I could probably knock myself down a level by maxing out contributions to a 403b. Option B would be to open a 403b with my current university but start contributing at or near the maximum from scratch in order to gain some benefit of the tax deferral. Meanwhile, roll the FTJ 403b into a tIRA at Vanguard and contribute what I can afford. Option C would be to bypass a 403b altogether and roll the FTJ 403b into a tIRA at Vanguard and contribute what I can to it.
Question 2: Not really a question, but I can’t see any reason not to move the Roth IRA from asset management at FTJ to a Roth IRA at Vanguard where, because of its small balance it would be invested in something like VTI or VTSMX because of the small existing balance and the cap on Roth IRA contributions. After consumer debt is gone, I would likely contribute to this account once I’ve maxed out my contribution to a 403b (if I’ve opened one) . If I went with option B or C above, I would make sure I made my maximum contribution to the Roth before contributing any money to the tIRA. Sensible, or no?
Question 3: My current retirement plan allocations through TIAA-CREF seem pretty lazy to me. I can rebalance the account at will between Real estate, Bonds, and Stocks. I can request that my money in the traditional annuity be redistributed to any of those three categories, but they will do this distribution over a 10 year period. I have about 25K of the 98K in the traditional annuity right now. I’m thinking of dumping real estate altogether, reducing my allocations (both in the current balance and in future contributions) to the bond fund down to 10%, and moving these into stocks. As I’ve said, there are some index funds available. They’re not VTSAX but they’re something. I’m also thinking I should cut future contributions to the traditional annuity and request that the existing balance of this be redistributed according to their ten year rule to the stock fund. Sensible or no?

Thank you for your stock series!! Your explanations are some of the best that I have ever read. I actually feel like I am finally getting the hang of this investing thing!
I apologize if this is explained above but was wondering if I could get some further clarification….
I am a high earner, so I am ineligible for a Roth IRA and a Traditional IRA would not be tax deductible. ( I already currently max out my 401K). I am trying to figure out if I should start a Traditional IRA but don’t see it offering much advantage over just a regular taxable account (assuming I open VSTAX in both and leave alone for the next 30 years or so….). I realize that the IRA is tax-deferred growth and has a penalty for early withdrawal, but wouldn’t the taxable account be tax deferred as long as I hold onto VSTAX? Am I looking at this incorrectly?
Thanks for your time!! (and the posts, the teachings, the hope for early retirement 🙂
Anna

I think you have a pretty good handle on the issues here, with maybe this exception…

You can hold VTSAX in either a non-deductable IRA or a regular taxable account. But in the IRA the dividends will be allowed to grow tax free until you withdraw the money in retirement. The contributions will come out tax free as you already paid tax on them.

In the taxable account, you will owe tax on the dividends each year as they are paid. But you are correct that you will not owe capital gains taxes unless you sell shares. Should VTSAX pay out a capital gains distribution during the year, you’d owe tax on it along with the dividends. But such distributions usually occur in actively managed funds and are very rare in VTSAX.

In short, with the IRA, your dividends can grow tax free but you have the restrictions inherent in an IRA. Not a great benefit but, depending on how many years before you pull the money, letting them compound tax free is no bad thing.

One thing more:

If you have both a deductible and a non-deductable IRA, when it comes time to withdraw money you can choose one or the other. The IRS requires that the withdrawals are proportionate across both. So you can’t use the balance the amounts you withdraw from each to help manage your tax bill as you can between an IRA and a Roth IRA.

Hi Jim,
First off thank you for this series! You have really changed the way I look at investing and retirement savings. You’ve changed my life!
I feel I have created a mess.

Recently the TSP opened a Roth Version! I have a Roth IRA that I am currently transferring to Vanguard funds. I also have a TSP account.

Unfortunately I am unable to transfer “Roth money” to my TSP but I can transfer my TSP to my Roth IRA holdings. I would like to consolidate all funds to one account.

From my simpleton understanding, since I already have a Roth IRA account I cannot open a TSP Roth account. I am also only able to fully fund a Roth IRA.

I am curious to your opinion on this? Would you consolidate funds or stop Roth contributions and go for TSP, or stop TSP and fully fund Roth IRA or maybe a little of both?

I have approximately 35K in Roth IRA and 15K in TSP. I am a few years away from military retirement but I have finally opened my eyes to the fact that I will not be able to live comfortably on my military pension.

Wanted to add to the thanks others have left re: your touching on TSP–most early retirement blogs don’t mention it, and I keep hearing a voice yelling at me to max it out before IRA’s b/c the expense ratio is so low. Your comparison to VTSAX is exactly what I’ve been curious about for a while, and the recommendation to leave in TSP C/S is what I’ve been contemplating for the past couple of weeks, now executed.

Background: 30 yrs old, graduated 2013 with 100K+ student loans, but good stable job that’s repaying 40% of that (psychologist in VA) and in a cheap, fun city. Bought a house in bottom of the market, now shoveling money to get rid of all loans within two more years, house 5 yrs after that. Started reading through MMM and your own blog, and was surprised that I’m actually on target to go part-time at 40 and cut out completely at 45 (if desired) since I still live like a college student. So thanks for the fun surprise that I don’t have to stay in my windowless office for the next 30 years!

Hey Jim, love the site. This is a great series, very helpful, many thanks.

After reading the post, I’ve got a question regarding assets in the Roth bucket, the term ‘tax-deferred’ seemed a bit vague to me in regards to it.

I currently max my 401k, max out a backdoor Roth, and am planning on putting whatever excess I can into a taxable account.

Before I start simplifying and re-assigning my allocations, I would like to check my logic…

Am I right in assuming that it would be best to allocate assets with the highest potential for growth to accounts with the lowest withdrawal taxation rate? I understand the tax-efficiency aspect of prioritizing stock funds to taxable accounts, but the higher projected growth of them seems to make them prime candidates for cheaper withdrawals…

So assuming this is correct, wouldn’t it be best to place all equity-based funds in Roth first, taxable next, then 401k? Bonds would be allocated in a backwards manner due to their lesser growth. My logic leads me to believe this would maximize the amount that can be withdrawn tax free at retirement…I would greatly appreciate it if you let me know if it sounds like I am on the right track. Thanks again and keep up the great work!

Thank you so much for the Stock Series. I am still making my way through it but I have learned so much just to this point. I was hoping to get your thoughts on my 401K situation. I have spoken with several “investment professionals” and all have basically given me the same answer, a version of “buck up and just do it.”

My questions is this, my 401K has a horrible return since I began investing in it 3 years ago (I know it is not a long time), but it also has a terrible fee structure across the board. The lowest fee rate is ~1.4%. I have read a considerable amount of literature and consulted the pros (who all agree my options stink) about cutting and running on my 401K, thereby taking it to an IRA or some other investment. However, all have said the tax advantages outweigh the fees and return and to just suck it up.

My questions is, are they crazy? Am I crazy? And should I just suck it up and forget about it until I have better options (I am trying to convince our internal plan manager to get out of American Funds or at least give us some better options….as of right now, we have no index fund options).

Hello Jim,
Please forgive me if these question sounds dumb or have already been asked. I am still making my way thru the series.

1) You mentioned earlier that “When you leave your employer you can roll your 401(k) into an IRA, preserving its tax advantage.”, but if I have more in the 401k (actually a Roth 403b, in my case) than is allowed by law to be allotted to an IRA, how can this be done?

2) When investing 50% of my income and provided my employer matches, say, 3%, which would be better long-term?

a) To invest 3% of my 50% into the company plan to get the match, then invest 50% of the remaining 47% into an IRA until it is maxed for the year, then invest all of the remaining 47% into a self-managed 401k with Vanguard and allocate the funds to the VTSAX fund?

OR

b) So that more money is working in one pot vs one large and one small, disregard the company match altogether and invest 50% of the 50% into an IRA until it is maxed for the year, then invest the full 50% into a self-managed 401k with Vanguard and allocate the funds to the VTSAX fund?

Lastly,
3) This is so much information for me to wrap my head around. Does Vanguard offer any over-the-phone support such that I can talk to someone and get help setting everything up? If I am going to “put all my eggs in one basket, and forget about it” (yes, I have been reading 😉 ) then I want to make sure that the basket is woven properly so that I don’t break any of my eggs due to my own ignorance.

Sorry for such a long post and forgive me if you answer these questions in a section I have yet to read. Thanks again for everything.

I recently discovered your blog through GCC and I’ve been binge reading. Thank you so much for the great info! I have a question regarding TSPs. Since you wouldn’t recommend that an individual convert his TSP account to a traditional IRA after leaving his job, would the traditional TSP still be more advantageous or would the Roth TSP be the way to go? Thanks again for this wonderful resource!

Hey Jim, just out of curiosity what would you say the breakpoint is for choosing Roth vs Traditional IRA. Is there an income that when reached its more effective to contribute to traditional for single and married both. Wonder if there is someone who has ran the numbers and found one.

2. More likely, the government could find an alternative way to tax the money. Increasingly in the US there is talk of establishing a national sales tax or added value tax. While both may have merit—especially as a substitute for the income tax—these would effectively tax any Roth money as it was spent.
~~~~~~~

Most of my 401k is in ROTH, most likely will be changing that after read this.
But i would 100% support losing all that already taxed money if the fairtax was ever passed. It would suck already being taxes, then having a large sales but, but the savings after a few years would be HUGEEE

Great article!! I’ve read a lot about the tax-advantaged account in the last few days as I just moved to a new job, and am planning for my 2016 taxes. I have one thing I’m confused about is you’re saying the Vanguard Total Bond fund should go into tax-advantaged account because it produces interest income. However, I looked up its page on Vanguard’s website and the fund’s pay out dividends, like any other mutual fund. So why does it matter if we keep the fund in a tax advantaged account or not?

Hello Mr. Collins, I’ve been reading your blog for a couple of months now and recently bought your book which I’m still reading. I enjoy your “voice” in your writings and feel like you’re a friend. I also enjoy your simple approach and encouragement that anyone can do this. Thank you.

That said, I struggle to get a handle on the language, and feel like I need a diagram to show me the buckets and what goes where. For example, what do I open first, a ROTH or VTSAX? And does the ROTH go IN the VTSAX? (I know, right??) Your buckets are VTSAX and VBTLX, but what do you have IN THEM and how do you decide? You’ve written about this, and I still don’t get it, but I’m trying to learn. I need someone to explain it like I’m a 5-year-old! Can you help or point me in the right direction?

A little about me … 53, and married to a guy who has always taken care of this stuff. But as we near retirement I want to understand what I’m looking at and determine if we’re on track and optimized.

Thank you both for your replies and help. Since my earlier comment I have a much better idea what the buckets are and what goes in them. But “boy, howdy” it’s complicated!

I recently opened two accounts at Vanguard. VBTIX is in my Traditional IRA, (will move to VBTLX next year) and VTSAX is in our non- tax advantaged bucket. Does this sound right to you?

Like I mentioned, my husband has handled all our investments since the beginning, and he’s done well for us. But now that we’re beginning to think about retirement, I want to be informed — and know what we’re shooting for and how we’ll get there. He is enjoying and appreciating my interest and a fresh set of eyes, and we have new goals and “To Dos” with both our heads in the game. Who knew that expense ratios would be a dinner topic??

Thanks to you Mr. Collins and the know how and inspiration you’ve provided, our current To Do List looks something like this:

Even though I didn’t (and still don’t!) know much about investing, I DO KNOW about being frugal and living below our means. “Paying ourselves first” has been the KEY to getting ahead and having FU Money. We have zero debt except our mortgage, drive old cars, and try to be educated consumers. We cracked $1M at about 50 y.o. and hope to get to two in 10 years. All of that might sound good and fine, but I cringe to think how much better we could’ve done had we been infected by the FIRE bug sooner.

Thanks to you Mr. Collins, when it comes to investments, I went from having my eyes squeezed shut, fingers in my ears saying lalalala, (can you picture that?) to “Trying.” That says a lot about how much you’ve captured my attention … which is growing to an obsession.

I’m a soon to be teacher and will be contributing to both my 403b and 457 accounts. Would I stand any advantage to additionally contribute to index funds? My apologies if you’ve addressed this already.

As a fellow teacher, I would like to recommend filling your 457 before the 403b because it is easier to withdraw penalty free. Also, since you are a beginning teacher, your salary might make it difficult to fully fund $18,000 into each account and $5,500 to the Roth IRA that your low taxable income would make most tax efficient. Unless you will be making considerably more than starting teachers in my area (~$35,000).

This is assuming you have equal options to invest in the 457 and the 403b. I actually do the opposite of my advice because only my 403b option has access to Vanguard funds. Unfortunately, Vanguard is in the process of implementing a $60 annual fee on their 403b accounts so I will need to reevaluate my options in a couple months when it takes effect.

hi – directly relating to your hierarchy for deploying investments as i am trying to figure out my own strategy. the way i have my 401k setup now is 8% traditional & 4% Roth. i am already well over funding to the full employer match – check #1.

However, you recommend to fully fund a Roth IRA in #2. Given the advantages you laid out between Roth 401k & Roth IRA. Would you recommend shifting my 401k to hold 8% traditional, 0% roth, and take that money and open a ROTH IRA? (instead of having it in roth 401k) That is where i’m struggling here.

i also have one more question, and i think i know it but want to confirm. my husband currently has stock in paypal, a good chunk of change maybe $20k. i know your recommendation on VTSAX, i am guessing you recommend selling all stock in paypal and opening a vanguard account with that money and invest fully in VTSAX? i am trying to get my husband to jump on board ha! thank u!

The Roth/Traditional question comes down to your tax bracket and the value of the deduction to you. Every dollar that goes to taxes is a dolllar you lose forever, along with all the $$$ that would have compounded over the years.

As for Roth IRA v 401k, my slight preference would be for R-IRA because that would save me transfering from the 401k when I left my job.

I don’t know what 20k is against your total but, Yes, having a large percent of your wealth in any one stock is very dangerous.

Hello Mr. Collins.
Quick question for you. I have a 401k with my company and I have started my Vanguard IRAs. I opened a traditional AND a Roth IRA, as I have no debt, no kids, and make pretty good money. My intent is/was to contribute the max ($5500) to both each year. I can do that, however, I would like to save a down payment for a house as well.

Should I just max out one of the two IRA’s until I get a nice sized down payment for a home or would you recommend maxing out both and save for a down payment over a longer period of time? Thank you for your time.

My initial plan was the same, but unfortunately you can’t fund both a Traditional and a Roth IRA with the full $5,500 each. That has to be the total amount contributed.

I opted for a Traditional and put the full $5,500 into that. Then again in the new year. My plan was to get it over the $10,000 minimum so it can be VTSAX. Now that I’ve done that I may start a Roth as well when I can.

Ahhhhh, ok. Well, you just answered THAT question. LOL! Thanks so much. Now the question becomes do I divide the $5500 equally between both or do I place it all into one so that my money can start growing faster?

In any event, thanks so much, NA! Looks like I can have a house AND a nice retirement after all.

Sure thing although the thanks really goes to Jim for starting all of this.

For about a second thought I was being clever by planning to fund both fully in the same year:) As for how to divide it up, that’s really just personal preference. I decided my most important goal was to get it, one over $10,000 as fast as I can because the cost of VTSAX is lower than the alternative, VTSMX (.05 vs .17). Then perhaps consider adding a Roth later, which I will probably do. Of course I’ll have to wait until next year:(

Haha! Yeah, I thought I was going the extra mile as well for my future, but alas, I can only fund one. Fortunately, I already have more than the minimum for VTSAX already funded in my IRA. I think ill just max out the traditional each year and call it good.

Home ownership ASAP resonates with me because I love the idea of living rent free, even if I own a townhome with HOA’s. I plan to stack a huge chunk of change and put a hefty down on something and pay it off ASAP. Still, ill read that link you shared and further consider the wisdom of Mr. Collins. Thanks again.

Yeah, definitely read it. I used to think exactly like you, but as I do more research and learn I start to question. Do you know Millennial Revolution? If I recall they did a guest post for Jim here. Seems to me if you boil down their advice to just one thing it’s to not buy a house..

Hi there – so I am just getting on this train and am in an interesting position : I own a business and am the sole employee. I was looking on Vanguard site and saw that there was a 401k option that could be funded up to ~50k with prom the business and personal side. That being the case it seems like the way to go? I would get a tax deduction on both the employee and employer side.

So the question I have is: would it be best to focus on that instead of jumping up to step 2, 3, 4?

Hello Mr. Collins. I have a 401k question, particularly regarding bonuses. My wife works for a company that pays bonuses a couple of times per year, but it is never exactly known which day, or even which month, those bonuses will be paid out. The size of the bonus differs from year to year, as well. How should she get those into her 401k to take advantage of pretax contributions?

For example, her bonus this month was 20k, but she was not told the size of the bonus, nor when it would be paid out, until the bonus had already been processed and taxed. She ended up with only about 13k when all was said and done, which is robbery if you ask me. Is there a way to avoid that (money taxed before we even have a chance to allocate it to her 401k) in the future, given the conditions I laid out above? Thanks for any advice, and thanks for a tremendously useful blog!

First the good news. The money withheld from her 20k was just that: Money withheld. How much, if any, you actually pay in taxes won’t be determined until you file next spring. So, plenty of time to add some of that money to her 401(k).

As for the mechanics of how to transfer her money into the 401(k), that is a question for her plan administrator/HR department. And, with the money being withheld, if you are concerned about having too much withheld and getting too big a refund next April (interest free loan to your Uncle Sam), she should also talk to them about adjusting her withholding levels.

Hi Mr. Collins, I really like your writing style and found your blogs very helpful. I had a question about the part where you compare deductible IRA with Roth. Kindly, correct me if I’m wrong. I think when you talk about extra $1667 in deductible IRA and its returns, I think you missed following things:
1. Returns on $1667 are going to be taxed later in Deductible IRA
2. Returns on the other $5000 are also going to be taxed in Deductible IRA
So, Returns for Deductible IRA after tax in 30 years are: 6667 * (1.088 ^ 30) * 0.75 = $62785
Whereas returns in Roth are not taxed: 5000 * (1.088 ^ 30) = $62782
Minor difference you see is because you rounded $6666.666 to $6667.
I believe that since you didn’t talk about other $5000 when you talked about extra $1250, it gives an impression that there is a huge difference.
I believe that the reason you should invest in one or the other should entirely depend on what you think interest rate is gonna be when you retire (up or down). Again, I am new to investing and I’m no expert on IRAs. So, I might very well be wrong. Thanks!

Love the blog, love the advice and the way you break stuff down. That said, I’m looking for your opinion on how I might bucket my savings. First the background/current approach:

35 years old, married, home-mortgager
Current salary $116K per year
Wife is self-employed which adds its own wrinkle, but for simplicity’s sake, let’s ignore that for now.
Company matches 6% in 401k plus gives a core contribution of 4%
Currently contributing 6% into 401k in order to get the full match
Currently investing $500/paycheck (every other week) into a good ole taxable Vanguard VTSAX

If I’m reading your hierarchy correctly,

1. I’m good on step 1 (fund 401k to full match).
2. At my salary level, I’m paying about 20% in total taxes (SS, Federal, State), but my Federal rate is only about 8%. I’m not sure whether or not a Roth makes sense for me based on this, but if it does, I can fully fund one for both me and wifey.
3. My MAGI in 2016 was over the limit to receive a tax deduction for IRA contributions, so I’m thinking no deductible IRA
4. If the Roth makes sense, here’s where we keep on keeping on with that.
5. Seems like I should now max fund my 401k
6. Having max funded my 401k, I still have some left. Here you say consider funding a non-deductible IRA if my income is such that I cannot contribute to a deductible IRA or a Roth, but my MAGI is low that I can contribute the full limit to a Roth, so should I do that at this point?
7. Anything left goes to taxable account.

So my question to you is, Roth or no Roth? I have been putting everything beyond the 6% 401k contribution into the taxable account because a) I wasn’t thinking about tax deductions and b) I like that I can go get it anytime I want to if I need to. I was also planning on paying off the house with a big chunk of change once I hit my FI number plus a sufficient cushion, but I’m wondering if changing my contributions from taxable to Roth (if that’s the right move) and 401k will limit my access to the money when I want to display the power of my F-You money in about 15 years 🙂

When you say your Federal rate is 8% my guess is you are referring to your overall rate. You probably got this from your tax software.

But in considering Roth vs. Deductible IRAs it is your tax bracket you want to look at. This will be higher and is the rate at which your money going into the Roth would be taxed as you’d consider it the “last” money of the total.

My work just started offering a Roth 401K. I already have 200K in a regular 401K but I know Roth 401K’s are better. What do I do? Do I move everything to the Roth (I actually don’t even know if I can do that?) Do I just keep with the 401K since I have quite a bit in there or do I now contribute to the Roth 401K??

Anna,
Technically speaking Roth & Traditional 401k or tax-neutral. (i.e. all things being equal, your after-tax cash after 59 1/2 will be the same)
GoCurryCracker has an excellent explanation of why for someone who is pursuing FIRE a Traditional is superior http://www.gocurrycracker.com/roth-sucks/

For other situations a Roth could be better. Some examples are:
1. Principal in a Roth can be withdrawn penalty free after 5 years. This can be a useful emergency tool for unforeseen occurrences.
2. If you expect your retirement tax rate to be substantially higher than during working years. (this could happen if you are saving 7 figure sums for a more traditionally timed retirement. Especially without the traditional deductions available during accumulation years, mortgage, payroll deductions, etc. Once RMD’s and SS kicks in your tax rate can quickly get a little crazy)
3. Roth can be an excellent tool to help protect an inheritance. There are unique RMD rules regarding an inherited Roth IRA that can help preserve some of that wealth from the taxman. Vanguard has a good explanation of it here. http://vanguard.com/pdf/s623.pdf

I’d really like to know more about your opinion of the TSP G fund. It’s supposed to be a good deal in that it offers a relatively high rate of return considering it is protected from loss. However, it may not outperform inflation. The other bond fund offered, the F Fund, typically offers higher rates of return but is not protected from loss.

I’m currently invested 100% in the TSP Lifecycle Fund 2030. This fund allocates approximately 31% to G fund, 6% to F fund, 34% to C fund, 10% to S fund, and 19% to I fund. After reading your book, I’m considering moving out of Lifecycle Funds so I can put a higher proportion into the S fund. I’m 49 years old and hoping to retire when I’m 56.

I would like to continue to allocate some money bonds. My primary question is whether I should consider the G fund, F fund, or a combination of both. I’m surprised the Lifecycle Funds allocate such a large percentage to the G fund (even the 2040 allocates 21%). It seems overly conservative. Any thoughts you have would be much appreciated.

Thanks for the wonderful book and advice. I’m planning to get a copy of your book for my 22-year-old niece as well.

I think your descriptions of the G and the F funds are reversed in this comment. Does that then mean your conclusion should say “You’ll want to use the *F-fund* [rather than the G-fund] for your bonds and the C-fund for your stocks.”? The F fund is the one that tracks the Barclays Capital U.S. Aggregate Bond Index. The G Fund is the one that holds specially issued short-term Treasury bonds that have the rate of long-term Treasury bonds but without any default risk and only negligible volatility.

P.S. I just read and really enjoyed your book, which is helping me to revamp my finances.

I love your website. I am in a similar position as one of your case studies (No. 4, EmJay). I had a few questions.

I understand your 50/25/25 philosophy, and that you should make transactions/balancing in tax advantaged accounts. My question is, if you are younger and close to FIRE (I’m in my early 40s), why would I want much, if any, bonds in my tax advantaged accounts? I understand that bonds are meant to smooth out the stock market’s highs and lows, but if you are not going to touch a tax advantaged for 15 or 20 years, why put bonds in there at all and instead let it follow the stock market’s likely growth? Then, simply convert 25% to bonds when you are 60+.

I have very little invested in bonds in my taxable accounts (less than $30k) and none in my tax advantaged accounts. I’m not really sure how much I realistically am going to need to have in bonds if I RE, and not sure where to hold bond funds that I do own. I’d rather not sell my stock index funds and be taxed, just to convert it to Total Bond fund.

Does this make sense? I am happy to clarify or provide more information.

So here’s my question. For aspiring early retirees requiring to hold a lot of money in ordinary brokerage accounts and staying mindful of having a balanced asset allocation so you don’t lose 1/3 of your stash right before leaving work, what bonds, etc do you hold on your brokerage account to smooth the rude but not get smacked upside the head with a bunch of taxes?

Hello,
First I want to say, love the blog! It’s completely changed the way I think about money for the better.

A friend of mine is a public school teacher in NYC and he is offered two retirement plans. The first is called a “diversified equity fund”. 50% of the funds is passively managed to track the Russell 3,000 index, 15% is invested in developing and emerging markets, 15% is allocated to “defensive strategies” , and 20% is actively managed by investment managers. The other retirement plan is a “fixed return fund”. This plan is a fixed return of 7% guaranteed by New York. At first I was baffled by this, insisting that it was too good to be true, but after looking into it im assured it’s real! My instinct is to tell him to go all in on that fund immediately, however im wondering if you had any advice to share? Also, what percentage of his income should be invested in this and what should be invested in a non retirement fund like a Vanguard account? It’s nice that it’s 7% return, however he’s young and isn’t retiring for a while so he will likely want some spending money in the mean time.

Michelle,
Wow, that was some interesting reading in those links! The 7% return on the fixed account looks great to me, but you have to wonder how much longer taxpayers will want to subsidize that return. That said, I’d be loading up that fixed account with a plan B ready just in case.

It looks like half of the fund is a Russell 3000 index fund with the remaining 50% of the funds is actively managed. The actively managed portion of the fund doesn’t wow me, but then again I like the low cost of 17.5 bips. While I’d prefer VTSAX (or a Schwab total stock market index), I might consider using the fund. Or, I might just take that 7% in the fixed account!

It seems that you have a couple of good choices in NYC. How much should your friend save? It depends on when he wants to retire. If I were in his shoes, I’d max ($18K) the fixed account at 7%. This would yield a cool $111k in five years and $266k over 10 years (source: http://www.moneychimp.com/calculator/compound_interest_calculator.htm). I’d also remind your friend that he can also hammer an IRA and possibly an HSA account.

At what tax bracket would it be wise to invest into a deductible IRA instead of a Roth IRA?

I have just opened up a Roth with Vanguard at the age of 21 and from what I can understand it is best to contribute to the Roth up to a certain income point. I have contributed 1k of VLXVX into it just to get it started and then I am going to transfer it all to VTSMX. Once I start to gain more income it would make sense to leave the Roth alone and start a deductible IRA. What are your thoughts on this?

I also have about 6k in VIMSX that is in a taxable mutual fund account with Vanguard. At the moment I’m just leaving that alone as it has grown to that amount over 3 or so years. Though I am contemplating in exchanging this to VTSMX as well.

could you please explain backdoor Roth and if that even makes any financial sense. our house hold income limits have been higher and we stopped contributing to ROTH IRA a few years ago. i never had a IRA account until now. With my new wisdom i have gained from reading this blog i am going to rollover my previous 401k to my newly opened IRA at vanguard and planning to contribute more every month form now which i suppose is what is called a non deductible IRA. since there is no way to differentiate what portion of this is pre tax and post tax money, rolling any of this to roth ira(backdoor roth) will be subject to additional taxes since the money i am going to rollover from my 401 k is a big chunk around 250k. so before the 401 rollover money hits this account, is it a wise move to contribute 5500 to this account and immediately rollover to Roth and then in the future, just contribute everything post tax to this account and keep it that way without doing any rollover to roth.

“TSPs are a no-brainer. If you are fortunate enough to have access to them, max them out. And in this one case, because of the ultra-low fees, I wouldn’t roll them into an IRA once you leave your job.”

Thanks for what you do!!! You’ve provided us with simple yet life-changing advice. We decided to take the bold move and we’ve switched all of our taxable investments from Edward Jones to Vanguard. Im 95% VTSAX and 5% cash. What a relief to know we are more in control with our finances and we are able to easily see where our money is going. We are dual military and maxing out our traditional TSP at $18K each + other taxable accounts. We are both 36 years old and we both have about 4 years left before we retire from the military. When we retire from the military we will make about $60K a year total in pensions from the military. At 65 when we plan on starting withdrawals from TSP, we will already be making $60K without any other investments. Would you recommend both of us maxing out $18k each in Traditional or Roth TSP while we are still in the military? I ran the numbers and it’s about $6500 we’d pay in taxes to invest in Roth. Thanks again for your community contributions!

If I am correct in thinking that when you say “… it’s about $6500 we’d pay in taxes to invest in Roth.” you mean you would save $6500 with the deduction that comes with a traditional IRA, I’d go traditional and keep the money.

Hello – my wife and I have been reading your book and came back to this section as we are ready to start. This section you lay out steps to get started with. We’ve already maxed out our 401k options. The questions that we have are 1. we both make decent income and looking at the ROTH guidelines we are still eligible to invest in this. if we are still eligible should we go forward with a ROTH or 2. start with a deductible IRA. Reading on the IRS we make enough to not get the tax deductions this option would provide. Trying to understand where to go from hear.

In my opinion, it is better to have some ROTH especially if you are planning to retire early so you can start taping it before 59.5. It can also function as an emergency fund.
I do traditional for 401k and Roth for IRA. You have to analyze your particular situation before making a decision.

The only reason to go with a traditional IRA is for the tax deduction, so if you are over the income limit don’t bother. But look closely because it sounds like you are in a high tax bracket where the deductibility is most valuable.

If the T-IRA fails that test and you still quality for the Roth, by all means fund the Roth.

But don’t stop there. By all means keep your savings rate as high as possible and once you have exhausted your tax advantaged options invest in regular, taxable account. A fund like VTSAX is inherently tax efficient.

Thanks for the reply. Looking at the IRS site, I show we will be above the 121k for filing jointly. Using that I believe we wouldn’t be able to get the deduction benefit with the IRA. Unless there is something else I should be looking at?

It sounds like the path to go is start with the ROTH and continue to fund that until we are no longer eligible to do so. Once that hits, we go towards the taxable account. Correct?

I’m very interested to find out your opinion on the below article. I believe I originally got the link from the Oblivious Investor blog. It argues that, counter to popular opinion, the risk of investing in volatile assets like stocks actually increases with time horizon. Thank you.

Following your hierarchy in step 2 – can you further explain if your income is low enough that you are paying little to no income tax? Trying to understand if we should open a Roth IRA or move onto step 3.

looking at 2016’s info our effective tax rate is 11.54% – taxable income is $97k. with this day in age i don’t understand what constitutes as paying little to no income tax? is 11% considered small?
would you recommend Roth IRA in step 2 or move on to step 3?

You want to look at your tax bracket, rather than your effective tax rate, as that is what your last earned dollars are taxed at.

So, if you are in say the 15% bracket, you would save $150 in taxes for every $1000 put in a traditional, deductible IRA. From there it is your call as to whether the benefits of a Roth outweigh the benefits of the deduction.

First off, I love your blog! Thank you so much for writing it. I discovered you when one of the guests on a Mad Fientist podcast mentioned how they used your strategies for financial independence. Needless to say, I am hooked!

I have a question I have been unable to answer, and it has been driving me crazy. I am a 28 year old and beginning my financial independence journey.

I have an old work 401(k) that is part Traditional and part Roth. I am planning to put the traditional part in my current work 401k, and then open up a Vanguard Roth IRA and put the Roth portion in VTSAX.

From there my plan, up until recently, was:
1) Max out my work 401k (it is currently in an S&P 500 index fund)
2) Max out the Vanguard Roth IRA account (my MAGI is around $72,000 so I will be unable to deduct any IRA contributions) with VTSAX.
3) Open up a taxable account with Vanguard and purchase VTSAX with my remaining money.

After reading this post, Stocks – Part VIII and http://www.gocurrycracker.com/roth-sucks/ I am really unsure about where it would be in my best interest to open a Roth IRA. Should I instead, after maxing out my work 401k, open up the taxable account and put my remaining money in there (including the $5500 I would have put in the Roth) and skip the Roth part? What advantage(s) would the Roth provide me that the taxable account wouldn’t?

When I retire, as long as I stay below the 25% tax bracket when I pull the long term capital gains and qualified dividends from the taxable account, they will be taxed at 0% – as GCC mentions in his post this essentially nullifies the major advantage a Roth would have. Any insight you can provide would be very much appreciated.

I think you are very much on the right track and the Roth is certainly worth doing. Since the tax deduction of a traditional IRA doesn’t help you, you are giving nothing up. Once invested in the Roth, your money is effectively beyond taxes. It will grow tax free and once you hit 59.5 any and all withdrawals are tax and penalty free.

In a taxable account, dividends and capital gain distributions are taxable in the year they are paid. Capital gains taxes are due when you sell shares that have increased in value. Your tax bracket will determine the percentage tax you pay and in the lower brackets you might well pay zero percent.

But there is no guarantee that you’ll stay in those low brackets. Indeed, starting as young as you are and as aggressively, my prediction is that if you stay the course you will be surprised at how wealthy you become and how eager the tax man will be to share in your good fortune. That Roth then will be sweet indeed.

Hello – Quick question as I became a little confused after talking with Vanguard.

We decided to do ROTH IRA due to not able to get the tax break with the Trad. IRA. I originally thought that any contributions to a ROTH I would have to pay taxes upfront and then from there any withdraws will be tax free (after 59 1/2).

After talking with Vangaurd, they told me that there isn’t any taxes I would pay on a ROTH IRA upfront since I was already taxed on it when I was paid.

Is this true that there isn’t any tax implications I have to worry about when putting into the ROTH IRA?

What the Vanguard rep told you is accurate. Everything we buy is with money we have left over after we pay taxes on our earnings. Same with buying (investing in) a Roth. You are using “after tax” money. But you don’t have to pay any additional tax to put it into the Roth.

In contrast, a regular IRA is funded with “pre-tax money.” Pre tax because you get to deduct this from your income before your taxes are paid.

Hi Mr Collins, I am a federal employee shooting for FI. Those who have access to the TSP should know the following concerning early retirement which is copied directly from the TSP website. I was very happy to find this as it makes maxing out my TSP (plus catchup contributions) all that much sweeter!

Early Retirement

If you receive a TSP withdrawal payment before you reach age 59½, in addition to the regular income tax, you may have to pay an early withdrawal penalty tax equal to 10% of any taxable portion of the payment that is not transferred or rolled over. However, if you separate from service during or after the year you reach age 55 (or the year you reach age 50 if you are a public safety employee as defined by section 72(t)(10)(B)(ii) of the Internal Revenue Code), then the 10% early withdrawal penalty tax does not apply.

I very much like how you explain how to think about your investment portfolio in terms of buckets. Recently I’ve come across another use of the term bucket in connection with personal finance called the “three bucket strategy” for traditional retirees and I’m trying to figure out whether they are at odds with one another. According to the “three bucket strategy” (https://www.youtube.com/watch?v=01tHgruimes&t=3s) , you divide your portfolio into three buckets, cash, fixed securities, and equities to address short term (1-2 years), medium term (3-7 years), and long term (8+ years) financial goals respectively. The basic idea is that on a yearly basis earnings from the long term bucket are used to replenish the medium term, and likewise dividends from the medium term bucket are used to replenish the cash bucket. For some curious reason the authors of this latter strategy don’t seem to acknowledge that most of the assets of a typical retiree will be held in retirement accounts, and in particular (aside from municipal bonds and treasury bonds) bonds are typically held within retirement accounts. So my question is whether you see the latter analysis helpful, or in point of fact inappropriate given that it appears to neglect whether the funds are being held inside or outside of tax advantaged accounts.

Hello, I just stumbled upon your blog from the Power of Thrift and Mr. Money Mustache. I am a Federal employee and have the TSP account you mentioned here. My goal is EARLY retirement. I have at least 17 years left here to be able to take out my pension, but after reading MMM I am definitely interested in seeing if I am able to retire in 7-10 years. My plan for this is to actually start my own separate account in Vanguard, while leaving my TSP money where it is. I currently pay more than I need to get the match, but I have not maxed out my contribution.

My question: If my goals is early retirement and I need to save in a separate account to get there, should I max out my contribution in TSP? Doing so will have me retiring later because I will not be able to save as much in a Vanguard account. My thought is that I would continue to contribute enough for employer match in the TSP and take out what is there once it is eligible (when I turn 50), but to save in my Vanguard account so that I can still retire early (age 40-43).

Age 32, pre-investor here but I have a question about 401(k) since it’s the only thing I have going on so far. Before I go any further, thank you very much for your time and insight. I’m working my way through a lot of blogs as a newcomer to the subject matter and feel more confident than ever that I will make wise, data-based decisions if/when I ever achieve a significant savings or savings rate. This is thanks to yours and others’ legwork and approachable styles.

In your article above I see:

QUOTE
“401(k) and 403(b) Type Plans
Contributions you make are deducible from your income for tax purposes.”

I was under the impression that 401(k) contributions were not tax deductible. Not savvy I know, but Google seems to agree. Is this a typo of sorts? Is it supposed to specifically be about the 403(b)? The wording makes it sound like 401(k) is deductible.

JL, first and foremost, love your stock series, and your talk at Google. I am in a fortunate situation where I was able to pick a single stock that have risen sixfold since 2009. The stock presently sit in an investment account with TD Ameritrade, gains unrealized. I currently have an investment account with Vanguard, with ~$50k of VTSAX invested. What would be your advice in moving my TD funds over to Vanguard VTSAX, from a tax savings and strategic standpoint?

I know the FI community doesn’t address this topic much but do you have any recommended resources on Social Security? Trying to figure this puzzle out in trying to help my folks planning out their retirement. Dad is 67 already and probably planning to retire in next 2 years, trying to figure out how to handle the social security issue.

Hi, I’m new to this blog and investing. I’m 41 years old and just started my first 401k plan last year. Since reading this blog and a few others I have been investigating my options through the 401k plan. My employer uses Wells Fargo and the only index funds are by Black Rock. There is a S&P 500, a mid cap and a small cap along with some different bond and money market options. My question is; are these index funds going to be ok?
I realize 8m late to the party but I’ve never had anyone show me the importance for investing and having something saved for the future. It wasn’t until my fathere in law was hospitalized recently and he has no savings that my eyes were opened. Any help would be greatly appreciated!

I’m new to this blog, but I’m digesting these one by one and making necessary changes as the information is presented to me. The words “thank you” don’t really convey just how helpful this has been, and how much I really appreciate it, but thank you!

I opened a personal Vanguard account but had to settle for the $3k minimum version index fund (VTSMX), because I’m still building up funds to invest for the $10k version. Still a win in my opinion, I’m in the right ballpark!

In that same light, I recently looked at the 401k plan I’m enrolled in with my employer, and to my pleasant surprise the Vanguard index fund (VTSAX version!) was offered, so I switched my current and future contributions over to that fund. A nice little work around. I just wanted to share this little victory, at 31 years old I feel like I finally have a good direction for my money thanks to you.

Your blog is amazing, even to a novice like me. In fact, I know almost nothing about investing. I get some of the basics (which are further clarified for me on your stock series), but I am generally overwhelmed by it all. And I’m a terrible planner. Or more accurately, I’m pretty in the moment and don’t think much about the future.

Anyway, I’m attempting something different, because I don’t want to work until I’m 80. I am looking into my employers 401K options (page 19-23 of this doozy:https://fd.broadridge.com/funddescriptors/00000GCR.pdf ), and there are a several Vanguard options. From what I can tell, there is a $28 fee per year plus the annual operating expense of each stock. I have pasted one of the Vanguard options here with a hope that you can interpret this for me:

Thanks! My current employer offers no “match” to 401K contributions, so I’m not sure if I should contribute to it or do my own thing with Vanguard.

My husband and I were very close to signing on with a financial advisor at a fee-based rate of 1.5% (comes highly recommended by family, but still!). I have been uncomfortable with this fee seeing as how even the industry standard is 1%. I’m so glad I bumbled onto your series! It sounds like having a financial advisor is ill-advised and we can manage this independently? Clearly I’m still unsure.

We’ve been listening to your book, and enjoying your blog. Thank you for both of these amazing and easy to understand resources.

In Part viii, you recommend rolling over a 401k into an IRA (“you can roll your 401(k) into an IRA, preserving its tax advantage. I’ve always rolled mine over. It gives you more control, greater investment choices and allows you to escape those ugly fees.”). I have a question about how you preserve its tax advantage. But first a bit of context –

I have a 401k account with Vanguard from a previous employer. I am no longer working so no longer contribute to the plan. The 401k account includes a traditional pre-tax portion and a Roth post-tax portion. I contributed to both portions during my employment. I also have an existing Traditional IRA and Roth IRA with Vanguard. I am considering a direct rollover of my 401k into my Traditional and Roth IRAs (pre-tax portion and post-tax portion, respectively). The reason for considering this is 1) simplicity, reducing the number of accounts to keep up with and 2) to save on the $48/year admin fees Vanguard charges for maintaining the 401k plan.

My question relates to the tax treatment of withdrawals from the Traditional IRA once I decide to take distributions (after I’m 60 years old). I’m confused by how you can mix the pre-tax and post-tax contributions in the IRA. *At the time of withdrawal would I pay tax on the pre-tax contributions that rolled over from the 401k, or just pay tax on the earnings, or something different?* I have tried but been unable to find any information on this.

I’m confused by how you can mix the pre-tax contributions (from the 401K) in the IRA (which has been filled with post-tax contributions). At the time of withdrawal would I pay tax on the pre-tax contributions that rolled over from the 401K, or just pay tax on the earnings, or something different?

There are income limits on contributing to a deductible IRA, however you can still contribute to your IRA, the contribution is just not deductible.

Those contributions, while not deductible, are also not taxed upon withdrawal; although any capital gains or dividends from them are.

It sounds like you have an IRA in which some of your contributions were deductible and some were not, and you are wondering how this will be sorted out upon withdrawal.

I’m not entirely sure, and you should check with Vanguard, however I believe the IRS requires you to report this each year and so there should be a record. Vanguard might also have a record. From there it it a matter of determining that a certain percentage of the IRA is made up of non-deductable contributions and this percent of any withdrawal will not be taxed.

If, as you also seem to be saying, you have an IRA made up of only non-deductible contributions, it should be pretty easy to determine what portion is made up of taxable gains and what portion is tax free non-deductible contributions.

Since your 401K is made up of deductible contributions, I would only roll it into a deductible IRA, just to keep things simple. If you don’t have one, you can create a new one for this.

Hi Jim,
Thanks for your wonderful site. It’s helped me figure out the finances for my family (stay-at-home dad, working mom, 3-year old energizer-bunny son). About two years ago, I put up to $65K (inheritance money) into a taxable account (VTSAX at Vanguard) when I was able to max out my 403b and our two ROTHs on my income (gross salary $68,850). We could do this because we were renting a very affordable duplex. However, because we’ve just taken on a mortgage for a house, I will not be able to fund the two ROTHs and still max out the 403b on my income. My questions are:
1. I’m planning to max out the 403b with my salary so that I can still get a bigger tax break. The tax break will go toward our emergency fund (for house repairs etc.). I then use money from the taxable account to fund the ROTH. Is it a good idea to sell VTSAX in my taxable account in order to buy the same VTSAX in ROTH or Traditional IRA for my husband and myself? If yes, are there tax rules to watch out for?
2. I opened and funded to the max with VTSMX a traditional IRA for my husband and myself in 2018 with Vanguard because I wanted to get a bigger tax break. But I see now in reading more that because of our low tax bracket, we should probably continue to fund our ROTHs instead. Should I leave the $5500 in each of the t-IRAs and pay the 0.14 expense fee on them or convert them over to our ROTHs which are at 0.04? Should I add to the t-IRA until we’re at the 10K threshold to get the 0.04 expense ratio?
3. The house is the cheapest house on the block where I want to live–walkable to work, downtown, school, great neighbors etc. The only house we could afford in this neighborhood really. We put 50% down for the down payment and took out a 15 year fixed at 4%. The 50% down was the only way we could afford a 15 year fixed. I just couldn’t bring myself to do the 30-year fixed at almost 5%, especially knowing that in 15 years, our son would be heading to college, with all the expenses that brings! My husband is 45 years old; I’m 43 years old; and we live in a small city in Wisconsin. The plan is that once the 3-year-old is in kindergarten, my husband finds paid employment again. Once we have more income coming in, am I right in assuming that we should prioritize our retirement savings over trying to pay down the mortgage earlier?
Thanks! Sorry if this isn’t very thought-out. The 3-year old has woken up and my thinking is all over the place.

1. It is fine to use money in one VTSMX account to fund VTSMX in a Roth or T-IRA. Basically you’ll just have the same number of shares. I don’t think there is a tax issue with this, but to be safe I’d buy the Roth or T-IRA shares with cash and then sell the VTSMX shares to replenish the cash.

2. I would just keep the t-IRA and begin funding the Roth if that suits your needs better. Once your VTSMX account hits 10k you can convert it to the lower cost VTSAX. Meanwhile, I wouldn’t worry about the higher ER. .14% is still very low.

I’m nearly finished up with your book and can’t thank you enough! Our investing strategy is well aligned with your recommendations and is good reinforcement with the wild stock market as of late. One area that caught me off guard is your recommendations regarding Roth vs Traditional as a younger investor. I’ve always been sold on: taxes are low now and will be higher later so go Roth! Your readings are changing my mind and making me consider moving to traditional to use the tax savings for long term growth in taxable bucket. Here is our situation:

-200k combined earners
-Both 31 years old
-We have TSP and 403b with trad and Roth as options
-In 2018 each max out TSP (Roth) & 403b (trad), maxed out 2X vanguard Roth IRA’s, and have a shared VTSAX in a taxable bucket that we invest in heavily.
-Currently no state income tax, no house, no kids, etc.

We are unable to have a deductible IRA due to our income. Our MAGI in 2018 allows for us to still do a Roth IRA without a backdoor since my wife is doing a deductible (trad) 403b.

Questions:
-Should we both do traditional TSP/403b, take the tax savings now, and let them grown in our VTSAX taxable bucket?
-Are we missing anything with our IRA’s? Roth seems like the best option and it doesn’t require a backdoor currently.

Parts of your comment contradicts other parts, so I am forced to guess here….\

You are correct: When your income is low and your tax bracket is too, a Roth makes sense. Once your income and bracket rise and the deduction becomes more valuable, it is time to look at a traditional IRA.

Sounds like you have a high income so, yes, you should fund your TSP and 403b accounts.

But that high income also means you should probably start funding a traditional IRA rather than a Roth.

Thank you for the response and info! Sorry if I’m causing confusion. I’ll try to be more clear.

We currently fully (max) contribute to a 403b, TSP, 2 individual Vanguard IRAs, and have a taxable Vanguard account (VTSAX) for anything extra.

We currently contribute to Roth 403b and Roth TSP. After reading your book we are considering switching these to Traditional 403b and TSP in 2019. This will reduce our taxable income in 2019 by $38,000 (19k contribution limit each in 2019) and increase our available take home pay by nearly ~4k/year in tax savings. We would like to take this extra amount and contribute it all towards VTSAX in a taxable account. In addition, we plan to fully max out our 2 individual Vanguard IRA accounts.

With our gross income around ~200k and our tax bracket at 22% does our plan to switch from Roth to Traditional 403b/TSP make sense? We can take the tax savings and invest them now into our taxable VTSAX account.

I’m in the midst of reading your stock series and book as well. Great information that is truly providing guidance. We’re just starting our Fi journey and most of the money we have is in an IRA and we have some in a taxable account. If we max out our 401k we won’t really be able to put much into our taxable account in a situation like this, would you recommended splitting the funds of our investments between 401k and taxable or go fully for the 401k?

Should I participate in my company’s 403b plan, and put money into a non retirement account (low fee index funds)? If I’m saving 20 % of my income, which is 65,000 before tax, should it be 10 percent to each? I’m reading through your stock series now.!

Long time reader, first time commenter. I just wanted to thank you for the series- it’s so easy to follow along with and I have been sharing it with as many family and friends as I can. Thanks for getting me hooked on investing!

Lets just simply say that my parents are typically American, and thus, not good with their money. My mother lost her job at 64, but had 12 weeks severence. Thankfully, she is about to be hired full-time (she is a nurse).

My mother will be making around $85,000-90,000 with this new job. She has around $350,000 in her 401K, and has about $65,000 of non-mortgage debt. I made her sell hers and my step-father’s cars (along with his 3 motorcylces and the ridiculous insurance it costs).

My step-father brings in $30,000 annually from social security and other pensions. I told my mother to hold off till she is 70 to start withdrawing from social security. Here is my question: should my mother roll her 401K over to a Roth IRA? I ask because I thought she could still contribute to a Roth even at age 70. With her SS being taken out starting in 5 years, there combined income would around $70,000 (and she will be working and still pulling in over $85,000 from her nursing income). I figured that she could have a withdrawal rate from her retirement that is very small, so the principle can keep growing.

I am age 70, still working and have about $50K I could transfer from my ROTH 401K to my Roth IRA. Within the Roth 401K it is is in VWINX. I think I could do better moving the money to my Roth IRA. Looking for a suggestion of which Vanguard fund to put it in? In fact, I have other Roth IRA money in Vanguard ($120K) and have had that in target fund. But I am thinking maybe VTSAX or some other fund. I hope to never touch the funds and pass them to my heirs. Any suggestions?